EUR/USD subdued above 1.1250 ahead of Fed, on cusp of potential bearish breakout

• EUR/USD is subdued in a 1.1250-1.1275ish range in the run-up to US retail sales data and the Fed.
• The pair has formed a pennant over the last few weeks and could be close to a bearish breakout.

EUR/USD is trading with its typical pre-Fed policy announcement, having for the most part spent Wednesday’s session thus far trading within this 1.1250-1.1275ish ranges. Tuesday’s hotter than expected Producer Price Inflation (PPI) report ensured that the pair was not able to hold above the 1.1300 level or its 21-day moving average at 1.1290, as it was seen strengthening the case for a significant hawkish shift at the coming Fed policy meeting.

Indeed, hawkish risk heading into this Fed policy announcement has been a key market talking point. The bank is expected to announce plans to speed the pace of its QE taper, while guidance on the path for future rate hikes will be closely scrutinised. This guidance will come in the form of written guidance in the statement, verbal guidance in Chair Powell’s press conference, and via the new dot plot.

The consensus in markets at present is broadly for somewhere between two to three rate hikes in 2022, but thereafter things are less clear. According to analysts at MUFG, “we can’t recall going into an FOMC meeting with the consensus so strongly favouring a hawkish outcome… (Fed Chair Jerome) Powell may emphasise the uncertainty of the guidance to such an extent this evening that it dampens the response... The scope for a big move for the US dollar this evening may be limited.”

In the run-up to the Fed meeting, FX markets participants will also need to ingest the latest US Retail Sales report (for November), out at 1330GMT. Significant volatility is unlikely this close to the Fed meeting, but EUR/USD does appear primed for a potential bearish break.

Since the end of November, EUR/USD appears to have formed a pennant formation and is currently hovering just above the lower bounds of this pattern, an uptrend linking the 24 November, 7 and 14 December lows. Should this level go, the door would be open for a swift move lower towards 1.1200 again.